pw79 pakistans energy crisis

7/27/2019 PW79 Pakistans Energy Crisis

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Cover photo: Drilling rig in North Pakistan,iStock

The views expressed in this report arethose of the author alone. They do not

necessarily reflect views of the UnitedStates Institute of Peace.

United States Institute of Peace2301 Constitution Ave., NWWashington, DC 20037

Phone: 202.457.1700Fax: 202.429.6063E-mail: [email protected]: www.usip.org

Peaceworks No. 79. First published 2012.

2012 by the United States Institute ofPeace

Aboutthe RepoRtPakistan has an acute energy problem that requiresincreased domestic attention to the problem and pursuit

of regional solutions, both to benefit Pakistan and to pre-vent this problem from being a source of domestic andinternational conflict. This report provides an overview ofsome of the key problems facing Pakistans energy sector,considers some of the solutions that the governmentis pursuing, and then concludes with a look at whatbenefits Pakistan could achieve by pursuing greaterengagement in regional and bilateral energy relations.

Aboutthe AuthoRElizabeth Mills is a freelance consultant with a focus onenergy, environmental, and geopolitical issues. She haswritten about South Asia for more than a decade and haslived and worked in the region.


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PEACEWORKS JUNE 2012 NO. 79

CONTENTS

[How Pakistan pursues its regional energy options . . .will either increase potentially destabilizing geopoliticalcompetition among regional actors or contribute to

new collaboration, strengthening regional ties.]

Introduction ... 4

Te Problem ... 4

Te Causes ... 6

Possible Solutions ... 8

Regional Prospects ... 13

Key Partners ... 17

Conclusions and Recommendations ... 20


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PEACEWORKS 79

Introduction

Pakistan is suering rom an acute energy crisis. Te countrys generating capacity alls well

below demand, and its available domestic energy supplies are dwindling. As a result, Pakistan

must pay increasing amounts or expensive energy imports. Te energy crisis is a complex,

long-running, and multiaceted problem, with several possible solutions. For the economist,

it is primarily a circular debt issue.1 For the political watcher, it is an issue o absent politi-cal will. For the aid organization specialist, it is a governance problem. For the engineer, it

is a matter o resolving technical problems, improving energy conservation, and addressing

issues like thet and nonpayment o electricity bills. All these viewpoints are valid, and such

solutions would go some way toward addressing the problem. But adding an additional layer

to an already complicated situation, Pakistans energy crisis is in part linked to the geopoli-

tics o its neighborhood. For some observers, pipeline politics and access to resources have

the potential to have a signicant impact on the tenor o a number o Pakistans international

relationshipsin the case o India, quite possibly in a positive direction. For others, these

geopolitical realities, when coupled with the domestically destabilizing political and socio-

economic eects o the power riots to which Pakistan is prone, point to Pakistans energy

challenges as a possible source o regional conict.It is clear that a caucus in Pakistan ully understands the extent o the issue: various high-

level committees over the years have astutely identied the problems and solutions, but there is

a repeat ailure to translate this into policy action. Pakistan needs to attack the problems rom

all angles. Some challenges require political will, while others require signicant nancing.

Estimates o how long it will take Pakistan to tackle the major problems vary considerably.

An Asian Development Bank (ADB) report, published in 2010, argued that with swit action

Pakistan could be on the right energy trajectory within three years.2 In the opinion o others,

Pakistan needs to get through its election year beore bold but unpopular decisions required

to reorm the power sector can be taken.3 With elections scheduled or 2013, the potential or

action is delayed until months into 2013 at the earliest. For others still skeptical that any uture

government will ocus on energy, the time horizon runs into a decade, possibly longer.For Pakistanis acing no relie rom the searing heat o summer months, nor rom the

damp cold o winter, and or an economy aected by a rising energy-import burden, with a

drop-o in domestic industrial activity as a result o daily power outages, all o these time

rames are too long. How Pakistan pursues its regional energy options to address these do-

mestic challenges, and how the world chooses to respond to these decisions, will either in-

crease potentially destabilizing geopolitical competition among regional actors or contribute

to new collaboration, strengthening regional ties. Given this potential, energy politics are

intrinsically linked to the uture stability o South Asia.

Tis report provides an overview o some o the key problems acing the energy sector, con-

siders some o the solutionsshort-, medium-, and long-termthat the government is pursu-

ing, and then concludes with a look at what benets Pakistan could achieve by pursuing greater

engagement in regional and bilateral energy relations. Te latter is oten overlooked when dis-

cussing Pakistans energy problems, with the onus typically placed on domestic solutions.

The Problem

It is not in the scope o this report to examine the technical strands o Pakistans energy

problems. Rather, the ocus is on mapping out the broad issues. First, however, some context

to the energy crisis is required.


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5

PAKISTANS ENERGY CRISIS

Pakistan does not produce enough energy to meet demand. As a result, it currently has an

electricity shortall o approximately 5,000 megawatts (MW) per day.4 Pakistans energy short-

all reects years o underinvestment and partly implemented reorms, resulting in a situation

where power consumption has risen 80 percent, with supply ailing to maintain this pace.5 It is

likely that this situation will only deteriorate. It is oten orgotten in all the talk o outages and

energy shortalls that around 30 percent o the population does not have access to grid electric-

ity, with around one-third o the population meeting its energy needs through noncommercial

sources. As more o these people seek access to grid electricity, demand will only increase.

According to the Pakistan government, power shortages are estimated to cost the economy

2 percent o its GDP each year, although some observers have suggested the gure is higher.6

Major shortalls were in evidence in 2011, with even some urban areas, which typically avoid

lengthy periods o load-sheddingor scheduled power outagessuering ourteen to eighteen

hours without power per day by October, with this gure rising to twenty-two hours in some

other areas.7 Te government has previously estimated that approximately $10 billion is required

to meet the countrys immediate energy needs, and at least twice this is needed or its longer-term

energy plans.8

Domestic energy supplies are dwindling. Currently, Pakistan has a gas supply shortageo approximately 20 percent.9 Natural gas supplies ell 33 percent in 2010 when compared

with gures rom 2009. Tis situation prompted the government in December 2011 to an-

nounce gas rationing in an attempt to counter the decit.10 Domestic oil and gas supplies are

orecast to be exhausted by 2025 and 2030 respectively.11 Already Pakistan imports around

30 percent o its energy supplies (mainly rom Iran).12 Te ADBs Integrated Energy Sector

Recovery Report and Plan or Pakistan has suggested that in 20089 energy imports totaled

more than $10 billion, which it argued could rise to as much as $38 billion by 201516 i

there is a ailure to take action to increase indigenous resources.13 It has been suggested that

given the difculties Pakistan aces in developing indigenous energy sources, its import tally

may rise to more than 75 percent o the energy mix by 2025.14

Adding to the problem is the act that Pakistan has long subsidized uel costs to lessenthe burden on the population. As energy costs have risen, this has proved to be a costly

policy. In December 2011, Finance Minister Abdul Haeez Sheikh revealed that the country

had paid one trillion Pakistani rupees (PKR) in subsidies and nancing to oset the losses o

state-run power companies in the past our years.15

More broadly, the impact on the economy has been wide-ranging. Te State Bank o

Pakistan (SBP), the countrys central bank, has warned that the government needs to ad-

dress deteriorating business conditions. It views the countrys energy problems as being the

most serious o these.16 Most obviously, a lack o power has hobbled industry, particularly the

energy-intensive textile sector that is the backbone o the countrys exports. At the same time,

an increase in power taris has undermined manuacturing by raising costs. Te shortages

also aect services. Te rail industry has reduced the number o routes it oers and has eventhreatened to stop trains as a result o uel shortages. Gas shortages have prompted a rise in oil

imports, which in turn has both increased inationary pressures (already rising as a result o

the dismantling o uel taris and the subsequent passing on o costs) and placed added strain

on the budget decit. As or employment, it is estimated that 4.1 million jobs and employ-

ment opportunities have been lost since 2008 due to the countrys energy problems, roughly

7.5 percent o the workorce.17

Notably, the governments energy perormance has only allen in the ace o a deterio-

rating situation. In July 2009, a Gallup poll ound that 53 percent o the population was

Domestic oil and gas

supplies are orecast to

be exhausted by 2025

and 2030 respectively.


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PEACEWORKS 79

6

without electricity or more than eight hours daily.18 Since then, the electricity shortall has

increased countrywide by 42 percent, with power outages rising sharply.19

The Causes

Many actors have ed into the problems Pakistan aces today. Tey include the ollowing.

Circular Debt

Circular debt is regarded as one o Pakistans major energy policy problems.20 Te problem

began when the government pledged to compensate energy companies with subsidies in the

ace o higher costs rather than allow them to increase prices, but subsidies then went unpaid.

As a result, energy companies have borrowed to make their payments, with many now reach-

ing a point where they cannot aord to borrow urther. As a result, with energy companies

unable to pay uel suppliers, uel supplies have been curtailed, or worse still, halted, which

in turn means that power companies have insufcient supplies to run their plants, reducing

generating capacity.21

A Lack o Investment

Te energy sector suers rom years o underunding. Attempts to attract private sector in-

volvement (particularly through privatization) have met with little success in recent years, a

situation that current nancing constraints (resulting rom the ragility o the global economy

and domestic scal problems) only exacerbate. As a result o underunding, existing inra-

structure is in need o repair and reurbishment, while plans or new plants and equipment

are either put on hold or delayed. Much eort needs to be ocused on upgrading and replac-

ing aging equipment. ransmission and distribution losses are high, and the average thermal

efciency o power plants needs to be increased.22

Reorm and Governance Issues

Pakistan has a national energy policy, but it is unresponsive, only partially implemented-

implementable, and at the mercy o competing bureaucratic interests. Overall, the sector is

poorly managed, exhibiting considerable institutional overlap and poor capacity, a situation

that has become more evident as the energy situation has deteriorated. Six ministries and

orty-two agencies are involved in Pakistans energy policymaking and provision. Successive ad-

ministrations have added task orces, created special adviser posts, and one-o commissions.23

Earlier reorm measures, particularly rom the 1990s, were only partially implemented.

Reorms, such as privatization, need to be reconsidered, and a more enabling environment

or reorm created through areas like regulatory improvement and enhanced security or

investors, their personnel, and assets.

Cultural Change

Pakistan nds itsel in the odd position o having low energy prices, and high levels o non-

payment. It is estimated that just 1 percent o the population pay or electricity. Power thet is

rampant, and unpaid bill losses are huge. Te national power company, Pakistan Electric Power

Company (Pepco), is reported to have seen collected revenue all in 201011, losing a stag-

gering $1 billion in unpaid bills.24 Yet the government subsidized natural gas at a cost o $3.5

billion over the same period.25

Pakistan has a national

energy policy, but it

is unresponsive, only

partially implemented-

implementable, and at

the mercy o competing

bureaucratic interests.


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Security Issues

Pakistan suers rom two types o security problems when it comes to energy development:

the broad, big-ticket security issues, like terrorism, and localized threats emanating rom very

specic grievances. It is unortunate that the countrys energy resources are located in challeng-

ing locationseither in terms o the security situation or available inrastructure. Much o the

countrys known gas reserves are ound in the restive province o Balochistan, with oil depositslocated in the troubled Khyber Pakhtunkhwa (KPK) province. Te Tar desert in Sindh holds

great potential in terms o coal reserves, but these have yet to be exploited. Te armys activities

against militants in and around Pakistans border areas with Aghanistan are well documented,

and the unrest in the region acts as an obvious deterrent to all but the hardiest o investors.

In Balochistan, a long-running, low-level tribal-separatist-nationalist insurgency under-

mines the security outlook, complicated by a hostile reaction rom the states security appa-

ratus. Tis not only undermines the security o the area where energy supplies are located but

also contributes to requent attacks on energy inrastructure. Even where the outlook should

be brighter, localized threats can and have emerged. Tere have previously been several bomb

and gun attacks as well as kidnappings o oreign workers operating in the energy industry.

Chinese and French engineers working in the port area o Gwadar, as well as interior Balo-chistan, have been targeted, and several killed.

Federal-Provincial Tensions

Te ederal and state (provincial) governments need to work together on the energy issue

given their overlapping remit, but there are numerous instances o tensions and deliberate

impediments to policy progress rom one side or another. Currently, this maniests itsel most

obviously in the tensions between the central government, and its policy plans, and Punjabs

opposition-run administration. Indicative o this, October 2011 saw Punjabs government re-

veal that it would not ollow ederal government plans to impose two weekly holidays in a bid

to conserve energy.26

A longer-running and serious issue is provincial opposition to ederal plans in areas

like hydroelectricity development. Tis routinely sees Sindh and KPK in particular oppose

large hydroelectric schemes on the basis o their negative eects, including displacement and

drop-o or silting up o local water resources. Past assurances o compensation or losses

connected to displacement have not been ully actualized, aggravating the sense o mistrust

and injustice.

ensions also exist elsewhere. Te constitution gives provincial governments ull author-

ity to exploit mineral rights. Most, however, lack the resources and expertise to develop sec-

tors like coal, but resent ederal government moves to do so, oten nding themselves insu-

ciently compensated. Tis, in turn, can oment urther unrest, creating a cycle o problems.

Te dynamic has been on display or some time in Balochistan where ederal-provincial

tensions over energy resource distribution are most acute.27

Bilateral and Regional Tensions

For Pakistan to enjoy long-term energy security, a strong oundation o trust with its regional

and international partners needs to be built. Nationalist politicking at other countries expense

and oolhardy activities that unsettle relations are not going to achieve this.28 Pakistan needs

regional-international buy-in to its plans, given that true energy security will have to be both

national and regional.


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PEACEWORKS 79

Possible Solutions

Pakistans current government came to power in 2008 aware o the large and wide-ranging

power problems but has ailed to tackle the issue head-on. Although some steps have been

taken, many ace obstacles to implementation, and more broadly, the government is regarded

as having taken too little action.

o date, it has hosted a number o high-level talks, out o which short-term energy sav-ing measures have emerged; sought to give a switer boost to generating capacity through

the acquisition o rental power plants (RPPs); created a drat petroleum policy29; and sought

to address the issue o taris, pledging to increase them by 2 percent monthly until the cost

o service has been ully recovered.30 Attempts have been made to address the issue o cir-

cular debt, through which the government set up a debt-holding company, Power Hold-

ing Ltd, with the aim o transerring PKR 302 billion rom energy companies balance

sheets.31 Finally, attention has also been directed toward implementing programs to rehabilitate

and upgrade transmission and distribution systems, in an attempt to reduce commercial losses.

Short Term

Establish rental power plants.In the short term the ocus is on boosting generating capacity as

quickly as possible. In this respect, RPPs appear to oer a good and, importantly, swit solu-

tion to Pakistans immediate energy needs. Whereas independent power plants take three to

ve years to come online, RPPs take just six to eight months with payment spread over three

to ve years. In August 2009, the cabinet approved installation o ourteen RPPs to generate

1,500 megawatts o power. Notably, the ADB, which the government asked to analyze the

usage o RPPs, concluded that the scheme should be supported, but that just eight RPPs

should be developed.

In reality, generating capacity has not come online as switly as had been anticipated.

Some observers have argued that greater attention should be paid to upgrading existing

acilities, which itsel would help address a signicant percentage o the generating shortall.

Te SBP, in its annual report, argued that the governments interest in RPPs was misplaced,

and instead, attention should have been ocused on resolving the circular debt problem. Cor-

ruption has also entered the equation, with the ormer water and power minister accused o

mishandling the award o contracts. Te situation has slowed policy implementation, and

the Ministry and Water and Powers actions have allegedly resulted in Pakistan receiving

aged generating equipment rom suppliers.

Curtail losses. Ending circular debt would undoubtedly be costly, but it would reap great

benets. Most obviously, it would increase the unds available to power generators, which in

turn could then pay their uel suppliers, ensuring that plants could operate at greater capac-

ity. Tis single act would be the quickest means to increase power generation.

Dismantling uel subsidies is another area that is receiving attention. Te government

spent PKR 395 billion on subsidies in the 201011 scal year, 75 percent o which went

toward subsidizing power consumption.32 Te government has taken some steps to take

apart the subsidy structure, but concurrent price increases or the consumer means that this

is a highly unpopular policy, and one that is consequently being pursued incrementally. Tere

is external pressure on the government to move more switly. In January 2011, the Interna-

tional Monetary Fund warned the government that its energy policy was inefcient and

untargeted, pointing out that large companies and the wealthy were taking advantage o the

subsidy structure, leaving poorer sections o society no better o.33


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Furthermore, the cost o subsidies weighs heavily on the economy, and by keeping prices

o uels like gas low, it makes introducing imports into the market difcult, because they will

naturally be priced higher. Low domestic prices are also creating a disincentive to exploit

new resources, either domestically or rom abroad, even though demand ar outweighs sup-

ply. Signaling the difculty o dismantling subsidies, the government has deerred decisions

over price hikes.A slightly longer-term but equally eective move at countering losses is to curtail trans-

mission and distribution losses. Tere has been some improvement in transmission and dis-

tribution loss gures over the past ew years, but it has been slow and had variable annual

results (see table 1). Further eorts require ocus on the upgrade o existing equipment, and

some replacement with new equipment. Attention to the energy assets Pakistan already

has would be another means to boost generating capacity, but even this option alls aoul o

hostile politics. Tis would also come at a relatively low cost, certainly smaller than building

new power plants. Plus, it is relatively straightorward to source the materials and technical

capacity needed to pursue this sort o program.

Associated with curtailing losses is the need to change the cultural mindset, and have

consumers understand that they need to pay or electricity. In the 201011 scal year, thegovernment paid PKR 82 billion to cover the costs o nonpayment o bills, thet, and trans-

mission losses.34 Changing attitudes is difcult or any government, but all the more so given

Pakistans high poverty levels, and the rising cost o uels. Again, however, by improving their

revenues, electricity companies would have greater unds at their disposal both to pay their

suppliers and also to invest in upgrading and purchasing new equipment.

Medium Term

Efect major policy change.Tere is some sense that Pakistans leaders appreciate the need or

policy change, but to date, progress has been lacking. opping the policy priorities is the

need or a meaningul, well-constructed energy plan implemented in ull. It should not be

underestimated just how difcult this will be or Pakistan. Such a plan is, however, essential

to setting the country on a path to short- and long-term energy security. Attempts to or-

mulate a comprehensive, single plan have so ar largely ailed. It had been envisaged that the

countrys Integrated Energy Plan 20092022 would produce an approved energy plan that

would help drive policy orward, but this has not materialized.

Instead, attempts to change policy have been piecemeal, maniesting themselves

in amendments to policy in areas like coal extraction and petroleum policy. Many as-

pects o the policy agenda require attention. One such policy area previously neglected is

Year Gigawatt Hours

200506 22,506

200607 21,912

200708 18,742

200809 19,396

200910 18,957

Table 1. Transmission and distribution losses (public utilities) by year,in gigawatt hours

Source: Ministry of Petroleum and Natural Resources, Pakistan Energy Yearbook 2010(Islamabad, 2011), 95.


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PEACEWORKS 79

energy efciency standards. Pakistan could make swit and major energy savings by sim-

ply better conserving its energy supplies and making construction more energy efcient.

No such standards exist or new buildings, and yet this would constitute a relatively straight-orward and cost-eective step toward conserving energy. In addition, the international

community would support such standards, ensuring Pakistan would receive the technical

expertise and required capacity to eect change.

Long Term

Pakistans skewed energy mix has created some o the problems the energy sector now aces.

Tere is talk about diversiying the composition o the countrys energy mix, with the gov-

ernment ocusing on gas, renewables, and, to a lesser extent, coal. Change is necessary given

the scal toll o energy imports and dwindling domestic energy supplies,35 but it is not an

overnight process and there are many actors to consider. In terms o generation capacity, in

200910, the country generated 95,608 gigawatt hours o electricity (see gure 1).

Gas. Pakistan has exploited its gas reserves, which partially explains why gas is such a

large element in its energy mix. When gas was rst discovered there in the 1950s, Pakistan

believed it had a virtually inexhaustible supply and directed much o its attention to devel-

oping the gas sector, with the aim o using it as a bridge while it developed other orms o

energy generation, such as hydro. Te government has remained keen to increase domestic

gas production, regarding it as the countrys uel o choice. Underlining this has been the

phenomenal growth o liquied natural gas usage in Pakistan, which now boasts the worlds

largest number o gas-ueled cars.36 More recently, however, there have been signs that the

government is looking to scale back gas usage in avor o developing renewables.

Tis is, in part, presaged on the act that known domestic gas supplies are dwindling. It

is estimated that by 2020 one o the countrys largest gas elds, at Sui (Balochistan), will

be depleted.37 Although anecdotal evidence suggests that Pakistan has urther potentially

extensive untapped reserves,38 security problems and pricing that ails to reect market value

deter the exploration required to identiy and exploit urther reserves. Added to this, wide-

spread ooding in 2010 damaged parts o the gas inrastructure. Te largest eld at Qadir-

pur, Sindh, which produces around one-quarter o the countrys total output, was orced to

halt production. Although reports suggest that ood-damaged gas inrastructure has been

repaired, the situation highlighted an unoreseen vulnerability.

Oil

Nuclear andImported

Gas

Hydropower

Figure 1. Electricity Generated by Source

Source: Electricity Generation by Source, in Pakistan Energy Yearbook2010, 88.

Pakistan could

make swit and

major energy

savings by simply

better conserving

its energy supplies

and making

construction more

energy efcient.


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For now, the ocus is on developing external sources o gas rom neighbors such as Iran.

I, however, Pakistan worked on issues like tackling security threats and improving well-head

pricing, renewed activity in the sector may prompt a rat o new gas discoveries.

Oil. Given that Pakistans oil reserves are small and not particularly viable given issues

o security and accessibility, it imports around 80 percent o the oil it uses. 39 Historically

this has not been much o an issue, although the 1970s oil hike should have signaled the

potential or problems. Friendly relations with Gul States have supported the practice, but

as prices have risen, Pakistans import bill has spiraled. Attempts have been made to attract

investment into the sector, but this has proved to be a challenging process given such diverse

obstacles as complex regulation and serious security issues. Furthermore, while other uel

sources are heavily subsidized, there is little incentive or exploration. As a result, Pakistan

will make little progress in developing domestic oil exploitation.

Nuclear. Pakistans civil and military nuclear programs have been the subject o many

column inches and much policy discussion in recent years. In terms o the energy mix, there

is little to write about: it is minimal, contributing just over 1 percent to the energy mix.

During the 1970s Pakistans civil nuclear ambitions were sizeable, with policymakers re-

garding this as the uture source o much o the countrys power. In context, this came duringa decade o oil price turbulence, with nuclear energy seemingly oering a clean, long-term

source o power generation. Tis ignored the massive upront capital costs to a country that

did not have the scal means to pursue such a program.

Since 1986, China has ormally supported Pakistans nuclear power generation program.

o date, the country has three nuclear power plants, the 300MW Chashma 1 and Chashma

2, and the 125MW Kanupp. wo additional reactors are in development, with the 340MW

(each) Chashma 3 and 4, the completion o which is expected in 201617.

Pakistan is a nonsignatory to the Nuclear Non-Prolieration reaty, and it has aced inter-

national sanctions on the supply o nuclear materials since it tested nuclear weapons in 1998.

Tis has stymied the sectors development, but not stopped the government rom expressing

its interest in increasing nuclear power generation. Te government has argued the need ornuclear energy as part o a greenand growthagenda and used the United States civilian

nuclear agreement with India to try to secure a similar deal. During 2010, speculation sug-

gested that this was a possibility, but given the deterioration in relations between the United

States and Pakistan over the course o 2011, such a deal can now be wholly discounted.

A reported increase in production in Pakistani nuclear warheads has ueled ears that

nuclear supplies will be unneled away rom civilian energy programs and into weaponry,40

even though Pakistan has kept its two programs separated to date. Events at Japans tsunami-

stricken Fukushima-Daichi reactor have thrown into question both the overall saety o

both aged nuclear-power-generating equipment and the use o nuclear technology in earth-

quake-prone regions, such as the one in which Pakistan lies. Beyond this, persistent doubts

remain over the extent o threat to the program rom extremist elements, especially givenPakistans history as a major source o prolieration through the work o AQ Khan, the ar-

chitect o Pakistans nuclear program.

Tese problems and the continued obstacles Pakistan will ace in sourcing nuclear mate-

rial and supplies suggest that this sector looks set to all ar short o government goals and

has limited prospects or signicant growth.

Hydroelectricity. In the postindependence period, hydro accounted or much o the coun-

trys power generation. It would appear to be the energy o choice or Pakistan: the country


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PEACEWORKS 79

has considerable hydro potentialestimated at 46,000MW.41 Hydro is also a relatively cheap

option once the upront capital is taken out o the equation, oering low generating costs.

Tere are, however, several major downsides to hydro, and Pakistans hydro schemes have

a history o problems. Hydro requires signicant investment, which ensures that Pakistan

needs support rom donors or partners like China. Te scale o many o the projects has re-

sulted in political controversy and corruption. On a provincial level, conicts have repeatedly

stalled projects as the provinces have quarreled over water and power resources and been

aced with location-specic problems such as population displacement. Federal-provincial

and interprovincial tensions require particular attention, but i political settlement can be

achieved, a major domestic obstacle to hydropower development would be removed.

Construction costs are high, and generating potential is unpredictable: seasons typically

aect the amount o power generated and silting in major rivers poses an ongoing problem.

Inevitably, when need peaks, generating capacity is low as a result o limited rainall. Added

to this, government policy that has subsidized electricity prices has undermined the nancial

viability o these sorts o capital-intensive schemes.

New projects need to address all these issues. Tat said, hydropower enjoys government

backing and renewed support rom the donor community as evidenced by the backing thatthe 4,500MW Diamer-Bhasha dam has attracted, with the ADB as the lead nancier.

Tis is all the more appealing given the green credentials o hydro, ticking the boxes o

both helping meeting Pakistans energy needs through domestic means and better managing

rising emissions.

Coal. Reecting the emphasis on gas and oil or power generation, Pakistan has just

one coal-based power plant, and yet the country has an estimated 175 billion tons o coal

reserves.42 o put this another way, it is estimated that Pakistans coal beds have the potential

to produce 100,000MW or three hundred years. Te problem has always been, and to a

large extent remains, viable extraction. Te reserves are located in the Tar desert in Sindh

and are o low quality. Until recent years, with plentiul supplies o gas and relatively low-

priced oil, there was no economic reason to pursue mining, and the coals quality made itunsellable to oreign buyers. Increasingly, however, extracting coal makes a lot more sense or

Pakistan. Doing so would provide a domestic and, thereore, relatively cheap source o uel,

and any excess coal (or, in time, excess electricity generated rom the coal) could be exported

to neighboring countries, most notably India.

Fiscal pressures have prompted a rethink at both the ederal and provincial level toward

Pakistans Tar desert reserves. Te provincial government is reportedly aiming to develop

ten blocks there or the production o 20,000MW by 2030, and in July 2011 the government

pledged the release o PKR 900 million or a Tar coal-gasication project.43 It is envisaged

that this will initially produce 100MW o electricity rom the conversion o coal into gas. It

currently appears that the government is more interested in this smaller-scale option than

the larger, and ar costlier, exploitation o Tars coal reserves.Given the sectors underdevelopment, a lot o work is needed related to the regulatory

and legislative regime. Investment has typically been deterred as a result o basic problems,

such as the lack o an up-ront tari price or coal and legislative inconsistencies. Steps

are being taken to address these concerns: the Tar Coal and Energy Board constituted a

committee to prepare a ormula or determining a coal price based on international best

practices, and the Sindh Coal Act is in drat orm. More wide-ranging, encompassing action

is required to instill investor condence. For example, in 2010 the World Bank withdrew


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its support or the Tar Coal and Power echnical Assistance Project (designed to produce

3,000 to 5,000MW o electricity), in part due to a lack o clarity.44 Tis dealt a blow to Tars

development as a coal reserve, not least given that the international communitys involve-

ment had provided credibility as well as much-needed technical expertise.

Given that Tar coal is particularly dirty, Pakistan can also be expected to ace environ-

mental opposition to its development o this sector.45 Admittedly, the domestic green caucus

has limited impact, but on the international stage, Pakistan will ace pressure. Tat said,

pragmatism is also expected to be a actor. Given Pakistans urgent need to reduce its energy

import bill, its best option is to tap into its domestic resources. Given international pressure

or coal extraction, the relative speed o construction, and the relatively lower costs involved,

this looks to be one o the most viable options currently available.

Renewables. Pakistan has a good set o resources or renewable energy: long hours o

sunshine make solar a viable option or approximately hal o the country, and it has a natural

wind corridor in Sindh. Tat said, it has made almost virtually no progress in developing a

renewables sector, despite a proessed interest in the sector or a number o years and the

existence o a dedicated government body, the Alternative Energy Development Board. Te

country has the potential to tap into biogas or waste-to-electricity, but again, this has notbeen pursued, suggesting little commitment on the governments part. Yet, renewables lend

themselves well to Pakistans energy needs. Tey oer a decentralized generation source,

oten at a local level, which would be o immense use in addressing the needs o the o-grid

rural population.

In 2010, the government vowed change in avor o renewables, a sentiment that has been

reexpressed recently. o this end, it passed the Alternative Energy Development Board Bill

2010, designed to replace the Alternative Energy Development Board Ordinance o 2007 in

the promotion o renewable energy. It has also partnered with the likes o the ADB and Ger-

many in a bid to drive orward projects and bring on board necessary nancing and know-how.

Unless Pakistan receives considerable support rom other nations, renewables are un-

likely to become a signicant part o the energy mix. Pakistans government lacks the visionand capacity to take this sort o program orward, and even strong growth in this sector

would be coming rom a very narrow base, and consequently ail to make much o an impact.

Regional Prospects

Tere is little doubt that Pakistan needs to boost its energy capacity. Tis, however, takes

time and resources, both o which Pakistan has in short supply. What is increasingly evident

is that Pakistans neighbors and the wider region will come to play a part in its energy secu-

rity. Some observers argue against Pakistans building domestic energy capacity when it can

become part o wider regional plans.

Like many other states in the region, Pakistan simply does not have enough natural

resources or long-term energy security. Perhaps more accurately, it will ace a signicant

shortall in energy until it can develop its resources, such as coal and renewables, and the

related inrastructure to a level capable o satisying domestic energy needs. As a result, it

needs to consider how it is going to manage its uture uel acquisition and potential sale.

Regional energy partnerships make a lot o sense, in terms o both sourcing uel and sell-

ing uel and electricity, and allowing Pakistan to benet rom the transit ees rom cross-

regional projects.


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PEACEWORKS 79

Perhaps the other key issue Pakistan needs to take into account is how best to get its

partners to buy into its long-term energy vision. Clearly, it rst needs a workable energy

vision, but, or this to be eective, its regional partners would have to lend their support and

seriously consider how their actions aect Pakistans energy interests. Alongside this, Pakistan

must also gure out its own position in terms o energy security. Tere are signs that it is

building networks, most obviously with Irana logical step though a problematic one given

Irans growing international isolationand Central Asia. At the same time, however, Pakistan

cannot ignore its South Asian neighbors, and nor can they ignore Pakistan. Te concept o

energy coexistence and cooperation, involving all countries in the region, has to be promoted.

Indeed, Pakistans prospects are tied to its geography: it sits on an important crossroads

between Central and South Asia, and between the Middle East and China. Tis makes it a

key state or any regional energy plans, and there are no shortage o these in both develop-

ment and play.

Pipelines

Tere is the potential or a number o pipelines (oil and gas) to transit through or end in Paki-

stan. Given Pakistans energy needs, it would benet rom several projects coming to ruition,but as the situation stands, the major pipeline proposals compete against one another. One o

two routes is likely to be realized: either APIa pipeline running rom urkmenistan (rom

its Dauletabad eld) on to Aghanistan, Pakistan, and nally Indiaor IP, a pipeline taking

gas rom Iran to Pakistan.

API enjoys the support o key players in the international community, most notably

the United States, and has its unding underpinned by the ADB. Reports suggest that in

December 2011 the United States oered to und Pakistans portion o the pipeline in re-

turn or an end to its involvement in IP.46 API would oment stronger energy ties between

India and Pakistan, and between Aghanistan and both countries, although there would

also be the potential or tension over transit: Pakistan could, or example, threaten to curtail

supplies during times o poor relations with India. API does ace a number o other signi-cant problems, notably security threats along its proposed route, difcult topography, which

increases construction costs, and political issues. Indeed, peace and stability in Aghanistan

is required or the pipeline to have a realistic chance o success. Tat said, its international

backers have ensured that the pipeline has made much more progress than it would other-

wise have made thus ar, although reports suggest that disagreement over pricing issues is

currently slowing its development.

Meanwhile, the $7.4 billion IP pipeline is progressing despite signicant and concerted

opposition rom the United States, Indias decision in 2009 to exit the scheme, and the

security threats posed by running the pipeline through Balochistan. Although IP would

strengthen Pakistans energy relations with Iran, it would come at the expense o relations

with a number o other states, particularly the United States. Pakistan aces a signicantpredicament, with a realistic prospect o it alling into a category o anti-U.S. states. Do-

mestic anti-American sentiment only serves to exacerbate the situation. India could also be

concerned, given it has reasonably good relations with Iran, and may not welcome a close

Pakistan-Iran energy relationship.

Te project has been on and o since the mid-1990s but enjoyed a renaissance in 2004

on the back o improving relations between India and Pakistan. Until 2007, progress in ne-

gotiations was signicant, culminating in some agreement on pricing. Tere was a very real

Pakistan . . . needs a

workable energy vision,

but, or this to be

eective, its regional

partners would have tolend their support and

seriously consider how

their actions aect

Pakistans energy interests.


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15


sense that this was an agreement in the ofng, a deal that would have seen Pakistan enjoy

not only access to Iranian gas supplies, but also potential job creation in parts o Balochistan

and Sindh and signicant transit revenues rom India.

Debate remains as to exactly why India decided to opt out o the project: some observ-

ers argue that it was as a result o pressure rom the United States, which used the India-

U.S. nuclear deal as leverage, while others suggest that Chinese interest (expressed in 2008)spooked India. Ofcially, India announced that the decision resulted rom security concerns

and a pricing dispute with Pakistan. Te possibility o China joining the scheme remains.

Tis possibility was again mooted in 2010. Chinas involvement would add a major assurance

to the pipelines longer-term prospects.47

With India out o the picture, Pakistan and Iran continued to negotiate the pipeline and

in June 2010, a contract was signed under which Iran agreed to supply the equivalent o 29

percent o Pakistans current consumption o natural gas.48 Various dates or the start o gas

transportation have been bandied about, and it is currently set at no later than the end o

2014. Te Iranian portion o the pipeline is nearing completion, though Pakistan still has

much o its section o pipeline to build.

Financing is a major obstacle. Currently, Pakistan is struggling to nance its segment othe pipeline, with possible investors deterred by the threat o possible retaliatory action as a

result o sanctions against Iran.49 Pakistan has recently reiterated its resolve to pursue IP, de-

spite the hurdles, and is reportedly exploring a range o nancing avenues rom export credit

agencies to development banks, Islamic investment unds, and Chinese banks, but appears to

be making little progress. As the problems mount, it is easy to lose sight o why Pakistan con-

tinues to ocus so heavily on this scheme. Certainly, the act that an agreement has been made

and timerame set make it a lot more real than its main contender, API, which is still being

negotiated. Proximity is another actorIran has nished its section o the pipeline, placing

the onus on Pakistan to ollow throughas is the act that IP is now a bilateral engage-

ment, rather than an inherently more complicated multilateral project involving countries

with which Pakistan has more uncertain relationships.Pakistan is integral to both projects, with any pipeline needing to cross Pakistani ter-

ritory, using either its existing energy inrastructure in Karachi or a new terminal at either

Karachi or Gwadar, Pakistans two port cities expected to act as an end point or supplies to

the country.

Electricity Transmission

Pakistans involvement with a Central Asian scheme, such as the Central Asia South Asia Elec-

tricity ransmission and rade Project (CASA 1000), which involves Kyrgyzstan, ajikistan,

Aghanistan, and Pakistan, would potentially improve its political relations with the region

ollowing a period where events in Aghanistan, and Pakistans conduct toward its northern

neighbor, have unsettled the Central Asian republics. Pakistan has historically been an ally o

many Central Asian statesparticularly through its ounding membership o the Economic

Cooperation Organization (ECO)providing easy access or goods to move between the

region and the Persian Gul. As relations with its Western allies have soured, Pakistan has

increasingly looked to the wider region or energy and trading tie-ups, although regional ten-

sions over Aghanistan have complicated the outlook or them. A urther strengthening o

relations with Central Asia, particularly i Pakistan continues to court Iran, would widen the

gul in its relations with both the United States and South Asia.


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PEACEWORKS 79

In August 2011, ajikistans ambassador to Pakistan, Zubaydullo N. Zubaydov, an-

nounced that Pakistan could end its power shortages i it acquired 2,000MW o electricity

rom the CASA 1000 project.50 Tis sounds ideal (despite the act Pakistan needs more than

2,000MW to address its shortages) but is currently unrealistic: the project, which was signed

in 2008, has yet to be completed, and is expected to transer just 1,000MW o electric-

ity rom ajikistan to Pakistan via Kyrgyzstan and Aghanistan. Te main downside is the

timeline: observers suggest that realistically Pakistan might receive energy rom it in ten to

teen years, making it not the answer to Pakistans energy needs, but one o several possible

uture sources.

Gwadar Port

Pakistan routinely seeks to sell itsel as a hub, its territory oering a corridor through which

energy and other supplies can ow. It has oered these services to Central Asia, arguing that

its own development as an energy and trade hub would boost the prospects o all Central

Asian republics, and it has repeated the oer to China. Given its proximity to the Gul states,

Pakistan oers an ideal land route through which to transport energy products into Chinas

remote and energy poor province o Xinjiang. Looking East, Pakistan oers an obvious tran-sit route into India and countries beyond. Additionally, it provides some access rom Aghani-

stan (and its hydropower resources) with the end client again likely to be China.

At the center o Pakistans potential to be a hub is its megaport o Gwadar, which sits on

the southern coast, approximately seventy miles east o the border with Iran. Construction

began in the early 2000s, and Gwadar nally became operational in December 2008. o date

it has ailed to live up to expectations. Tese ranged rom the anciuldescriptions o it as

a South Asian Las Vegasto the more interesting, a possible rival to Dubai. Its location,

however, remains ideal. Gwadar is close to the Straits o Hormuz, through which around

40 percent o the worlds oil cargo is shipped. Couple this with plans to develop the acility

beyond a container port into a petrochemical and rening unit, and then use the acility to

serve as the meeting point o as many as ve regional oil and gas pipelines, and you havewhat on the ace o it appears to be a winning proposition.

It seems that at one stage China bought into this too. China was believed to be respon-

sible or approximately 80 percent o the widely quoted $200 million unding or the rst

phase, and was instrumental in providing the materials, workers, and technological know-

how to the projects construction. Tere has been much discussion about Chinas true in-

tentions regarding Gwadar. It is not the remit o this paper to question whether China is

developing a listening post, a string o pearls naval capacity in the Indian Ocean, or indeed

posit any other theory about Chinas intentions. Te act remains that owing to its location,

Gwadar does potentially oer the basis or an energy hub, should China at some point wish

to use it as such. Tere are signs that China may be considering this as a long-term strategy.

Indeed, there are ew other reasons why it would continue to work on plans to lay a trans-Himalayan oil pipeline rom Gwadar to Xinjiang, which would ultimately allow it to reduce

its dependence on oil imports shipped through the Straits o Malacca.

Energy Trading

Te real potential market or regional energy set-ups should not be underestimated. India is

setting up electricity sharing agreements with the likes o Bangladesh, Bhutan, Nepal, and

Sri Lanka, where it is investing in the transportation inrastructure as well as in-country gen-


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eration schemes in the hope that once other South Asian nations develop excess generating

capacity India will be best placed to absorb it.51 From a pure energy standpoint there is no

reason why India and Pakistan should not pursue similar linkages. As this report has already

highlighted, Pakistan has large coal reserves in close proximity to a large-scale industrial base

in Indias state o Gujarat. At the same time, India could sell electricity to Pakistan when it has

excess capacity, osetting some o Pakistans immediate shortall.

Although relations between India and Pakistan remain troubled, energy cooperation

should not be ruled out in the longer term. Pakistan is a major transit state, and India has

good relations with countries like Iran and Aghanistan. Te need or power may well be a

major determining actor in boosting the India-Pakistan bilateral relationship to the level

where both states can benet.

Te classic example o pragmatic cooperation is the Indus Waters reaty, which saw the

two countries agree on water sharing o their cross-border resources in the 1960. Notably

it has never been revoked, even during times o warare between the two states, but it was

agreed a long time ago in a very dierent political and economic climate. Possible signs o

the start o an energy relationship came in early 2012, when it emerged that India and Paki-

stan had agreed (pending agreement by respective deense ministries) to trade energy acrossthe border between Lahore (Pakistan) and Amritsar (India). Tis amounted to 500MW,

with a tari linked to market rates, and was described as a move to strengthen business rela-

tions. alks were also scheduled to discuss the use o a 200-kilometer pipeline, located in

India, which would transport surplus diesel to Pakistan.52

Key Partners

What is striking rom the literature on Pakistans energy dialogue with its partners is the

amount o talk, but very little delivery. Tere are lots o discussions, some o which are ollowed

with memorandums o understanding. Deals are agreed, but less than the amount o dialogue

would suggest. Oten the impression emerges o a country that is so desperate or help thatany lieline another state can oer is quickly grabbed. Support generally alls into one o two

camps: some states are comortable as acilitators, organizing unding, and others will oer

broader support, working on specic projects in Pakistan.

China

Pakistan enjoys a strong relationship with China, and China has been active in Pakistans en-

ergy sector or years, reecting the countries historic diplomatic ties. China is the partner that

oers up the big deals, both in terms o project size and numbers o rms involved in Pakistans

energy sector. It is difcult to source any reliable gure identiying the overall size o this, but

both governments have made reerence to billions o dollars. Complicating the situation, the

Pakistani government is keen to publicize the strength o relations, giving positive publicityto the countrys relationship with China and highlighting the partnerships value in rhetoric

though not necessarily in substance. Tis contrasts sharply with more recent coverage o rela-

tions with the United States, which have increasingly come to be portrayed in a negative light.

China has played a pivotal role in Pakistans nuclear energy sector, constructing nuclear

reactors, and allowing these to continue unctioning in the ace o international sanctions

and restrictions. Attention has also been ocused on hydropower, with China expressing an

interest in working with the Water and Power Development Authority (WAPDA) to help


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PEACEWORKS 79

develop a number o large-scale hydropower projects.53 Renewable energy is getting increas-

ing amounts o attention, with China helping to develop three wind arms and also several

solar projects in Pakistan. More recently, the two countries set up the Joint Energy Working

Group ( JEWG), which held its inaugural meeting in August 2011 on the back o which a

number o agreements were made.

Tis all looks very impressive, but there is a nagging doubt as to whether China is work-

ing in Pakistans best interests. Te JEWG is an interesting case study. At the inaugural

August meeting, a number o agreements were signed covering a range o energy projects.

Whether these will all be ollowed through is another matter. Te JEWG may prove to be

an eective tool that has a signicant impact: it has the potential to help deliver more e-

ectively in other areas, particularly increasing attention on projects to improve the existing

inrastructure. For some observers, however, the group is unlikely to have much substance

and is instead designed as a deliberate snub to the United States and its continuing energy

dialogue with Pakistan.

It is also notable that China will not transer technology to Pakistan. Media reports

suggest that Pakistan has previously asked or help rom China to develop a renewables

manuacturing industry.54

Pakistan has a history o manuacturing medical equipment, somoving into an area like parts or renewable technology appears viable. o date, China has

reused this request, and as such, any ambitions Pakistan has in this area remain stalled due

to a lack o technology and unding.

In one more questionable move, according to energy industry sources, China uses Pakistan as

a means to advance the competitiveness o its own designs. Tis is certainly the case in the nuclear

sector, where it eectively highlights to other nations its tried and tested capacity in this eld o

reactor development through the work it contributes to Pakistans civil nuclear program.

Doubts aside, the act remains that China oers unparalleled support to Pakistan, at least

in the view and discourse o the Pakistani government. In reality, it may be something o a

passive best riend, providing this support when it suits its own circumstances rather than

those o Pakistan. As Pakistan sees it, however, China remains a constant and ar more reli-able ally than any other country.

United States

Te U.S. government, through its aid arm, the USAID, has supported Pakistans energy

sector as a part o wider programming or decades. Notably, the energy sector has received

an increasing share o this overall unding as the countrys power shortalls have intensied.

Unortunately, this comes at a time when deteriorating relations between the two countries,

and a nancial squeeze on the United States budget, means that nancing levels are alling.

In August, the USAIDs Pakistan head o mission, Andrew B. Sisson, revealed that the

energy sector now topped his organizations work in the country, with $254 million allocated

to the sector alone, up rom $86.5 million in 2010.55 Tis however, is a very small amountwhen considering the argument that Pakistan reportedly needs at least $10 billion to make

its energy sector viable, and also when compared with the billions in U.S. military aid that

have gone to Pakistan since 2001.56

Like the projects China supports, the U.S.-supported projects are spread across a range

o requirements, with ocus alling on supporting the completion o the Gomal and Satpa-

ra dams, the upgrade o the arbela dam, and consideration o nancing or the Diamir-

Bhasha dam; improving thermal power plans, with a ocus on Guddu and Muzaargarh;


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and supporting projects that increase greater uel efciency in agricultural irrigation, which

it is hoped will save 1,000MW o power.57

Te act that Pakistan enjoys close relations with China and Iran is a problem, essentially

placing Pakistan in the wrong club or the United States. Relations between the two coun-

tries have been steadily deteriorating, markedly so since 2011, but this does not mean that

wider energy relations should become a casualty. Both sides need to work out a long-termvision or their energy partnership. Providing tangible benets in terms o radically en-

hanced energy supply could go some measure to repairing relations, and potentially set them

on a sounder and more strategic course or coming decades. For this to be achieved, however,

energy must be regarded as part o the United States strategic relationship with Pakistan.

I the United States chooses to regard energy as such, it needs to seriously consider the overall

impact o two policy directions. First, is it going to try to use energy assistance to seek to inu-

ence Pakistans domestic policy? Second, is the United States willing to support the energy needs

o Pakistan and the wider region through its own diplomatic activity? Given the United States

concerns vis--vis China and Iran, it would appear that wider geopolitics will continue to trump

energy diplomacy. Tat said, condence and trust are required. Te United States can potentially

give Pakistan a lot o support, not just as a bilateral partner, but also by lobbying other govern-ments and international organizations on Pakistans behal. Both sides need to shed the mixed

messages and speculation that prevail at present. I relations improve, so this support is likely to

increase, but should relations sour urther, incentives and unding are likely to be minimized.

Iran

As Pakistans energy problems have increased, it has increasingly looked to Iran, which routinely

provides it with electricity to oset major shortalls. Underpinning this relationship is, o course,

the IP pipeline. A clear upswing in the number o ofcial Pakistani visits to ehran and meet-

ings between key Pakistani and Iranian groups and ofcials underlines the increasing importance

that Pakistan is placing on this relationship, at a time when internationally Iran remains isolated.

As this report has highlighted, Irans isolation is creating problems or Pakistan. News

reports suggest that it is seeking to borrow $300 million rom local banks to und its section

o the IP pipeline.58 Domestic unding is necessary because sanctions on Iran are likely to

block multilateral and Western unding.

Russia

Russia may be Indias historic ally, but given Russias heavyweight presence in the global

gas market, it is unsurprising that Russia sporadically expresses interest in the likes o the

IP pipeline. It has been previously suggested that Gazprom may stump up unding or the

IP pipeline,59 while in May 2011, during a state visit with Russia as host, a memorandum o

understanding was signed in support o energy cooperation.60

Te memorandum encouragesthe development o Pakistans oil and gas elds, as well as related gas endeavours, such as

developing storage capacity.

Saudi Arabia

Saudi Arabia is more o a und manager than active partner in Pakistans energy aairs. Tat

said, it is a big und manager. In April 2011, it announced it would both contribute to and

seek out unding rom other Arab states or the Diamir-Bhasha dam. Tat said, and despite


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PEACEWORKS 79

the strength o a ty-year relationship behind them, relations tend to be ckle, with Saudi

Arabia oering and withdrawing unding depending on how it perceives the political cli-

mate.61 Diplomatic cables released through Wikileaks and reported on in November 2010

highlight the personal dislike that Saudi Arabias King Abdullah has or Pakistans president

Asi Ali Zardari. Abdullah is quoted as saying that Zardari is the greatest obstacle to Paki-

stans progress, adding, When the head is rotten, it aects the whole body.62 Saudi Arabia

has also railed against Pakistan omenting stronger relations with Iran.63

Turkey

urkey and Pakistan have a lengthy bilateral relationship. It should come as little surprise that

energy relations have become an increasing talking point between them, alongside the more

traditional trading negotiations. In August 2011, urkey oered to support Punjabs govern-

ment in its attempts to develop coal, hydro, and wind power-generation projects.64 In a more

recent move, the country dispatched an electricity generating ship, with a capacity o 230MW,

to Pakistans port o Karachi, in a bid to alleviate some o the citys power problems.65 At this

stage, urkey tends to oer expertise in preparing easibility studies, but Pakistans broader aim

will surely be to cultivate deeper energy relations.

India

India gures large in the regions uture energy security and must be included in Pakistans

long-term plans. Te two countries need to establish a workable energy relationship. Indeed,

there is real potential or an energy relationship between India and Pakistan, and not just one

that sees India supplying the energy. Te location o Pakistans massive coal reserves so close

to the border with Indiaan area not prone to the type o violence witnessed elsewhere in

Pakistanwould make supply routes short and easy once the requisite inrastructure is in

place. Given that coal is a dominant uel in Indias energy mix, it would be shortsighted not

to consider Pakistan as a uture supplier. Tey do not have to like each other, but they do need

to cooperate on something as crucial as this, or the regions economic development alls into

question. Te onus is on both countries to show the type o pragmatism and initiative that was

in evidence during the Indus Water reaty and even the IPI pipeline negotiations to some

extent. Tis provided a glimpse o what was possible, and it can only be hoped that both states

have much more to oer.

Conclusions and Recommendations

Tere are dierent lines o argument on the direction the regions energy partnerships and

relationships will take. Some observers argue that as a result o broad energy needs, wider

regional cooperation will develop. Others, however, see a continuation in the historic divisions,

viewing stronger Sino-Pakistani energy relations as curtailing Pakistans energy relations withIndiaand by extension with South Asia as a whole. A continuation o this historical trajec-

tory cuts Pakistan o not only rom possible energy supplies rom India, but also rom longer-

term regional projects ocused on hydropower development and gas rom countries such as

Bangladesh and Myanmar.

Ultimately, Pakistan must prove it is a worthy ally to the key players in the region. Tis

is going to require a lot o work, and also condence on Pakistans part. Te term unreliable

alliescould be the tagline or Pakistans history; so oten allies have pledged assistance, only


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to pull the plug at a later date. Te reasons or this are myriad, ranging rom geopolitics and

the domestic politics o a particular country to Pakistans own problems and political land-

scape. Some outcomes have been ully justied, others highly questionable. Te act remains,

however, that Pakistan has ew real allies. And as battered and bruised as it is, Pakistan needs

to overcome past experiences, and recreate itsel as a dependable, trustworthy partner. Tis is

going to be difcult or Pakistan in relation to its allies, let alone its enemies.

Currently, Pakistan is not well placed to transorm itsel. It is in a scally ragile position

and politically charged as it heads into an election cycle. Its security situation is poor, and

social unrest is unusually high, in part ueled by energy shortages and unemployment. Its

ortunes on the world stage, which peaked around 200506 through its cooperation with

the United States in the so-called war on terror have plummeted. Regionally, relations with

India are low level, though they have picked up in recent months, and diplomatic lines with

Aghanistan have become increasingly complex and difcult as a result o cross-border

security issues and hedging strategies or the postInternational Security Assistance Force

era. Globally, relations with the United States are in their worst place in years, reinorcing

the long-held domestic view in Pakistan that the United States courts the country when

the need arises and later drops it once its useulness has expired. Te international com-munitys preoccupation with Iran has complicated the regional energy set-up, contributed

to delays in this important scheme or Pakistan, and raised concerns about Irans capacity

to ull supply pledges.

More positively, regional rameworks are in place that could be ar better employed. Most

obviously these are the South Asian Association or Regional Cooperation (SAARC) and

the Economic Cooperation Organization, both o which need to be developed with a ocus

on energy and development. Added to this is the act that both India and Pakistan have

reasonably good relations with Iran. Tis should be a bonus, allowing them to work together

towards wider regional energy goals, helping them to move beyond mutual, underlying sus-

picions that currently color the proceedings. Tat China plays a part in this too does not have

to be the impediment that is oten suggested. Te rivalry and mistrust between India andChina is clear: the task is not to oment it. India and China do not have quite the combative

relationship that many reports like to paint them as having. Tis does not mean that rela-

tions are warm, but China, in particular, noted or its oten pragmatic stance on economic

matters, may opt to support regional energy set-ups should it judge a projects benets (to

itsel ) to outweigh the costs. Longer-term moves by key players like the United States (par-

ticularly i it settles on a distinctly pro-India, anti-China stance in South Asia) will not help.

What the region and its less ortunate players like Pakistan need is support. It does not need

to be unqualied, but it will need to be pragmatic. Without this, a region and a country with

a lot o potential will simply nd the potential wasted.

Moving orward Pakistan has some key decisions to make, but, as highlighted, the geo-

politics o the region are difcult and raught with pitalls. It may be that classic alignmentscontinue to dictate the situation, including energy relations. So Pakistan and India will re-

main at odds, Pakistan will retain its close ties with China, and i U.S. interests in the region

take a more obvious pro-India stance, Pakistan will nd itsel outside the U.S. club. Paki-

stan will still enjoy some support rom China, and will seek to maintain relations with other

allies, but these relationships may be problematic. O these, Iran remains the most difcult

or the oreseeable uture, and Pakistan needs to tread cautiously to avoid undermining its

international standing.


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PEACEWORKS 79

Frequently, Pakistan is aced with difcult choices, with every avenue that appears to

oer a new energy source also having a major downside. It may increase its energy imports,

and so oset domestic energy problems, but concurrently undermine its scal position. It

may embark on stronger energy relations with India, but this may trouble its ties with China.

Similarly, within SAARC, it may approach Bangladesh or a gas tie-up, but in doing so,

imperil relations with India. In this respect, there appears to be no single win-win situation

or Pakistan.

What would be more positive or Pakistan would be the development o a more multi-

polar system. Mutual energy need may help dissipate traditional divisions between countries.

Tis is certainly the best-case scenario or Pakistan, and one that curtails the gain-and-loss

pattern o its current energy relationships. o that end, the ollowing recommendations or

Pakistan are made:

Pakistan needs a new and workable national energy policy. Its current policy documentis unresponsive, only partially implemented-implementable, and at the mercy o compet-ing bureaucratic interests. Attempts to ormulate a comprehensive, single plan have so arlargely ailed. As such, it should not be underestimated how diicult this task will be orPakistan.

Alongside this, Pakistan needs ar better management o the energy sector, which canonly be achieved by streamlining the responsibilities and number o ministries and othergovernment departments involved in policymaking and implementation. ensionsbetween the ederal and provincial governments also require attention.

Domestically, Pakistan needs to address key issues like eliminating circular debt, dis-mantling the uel subsidy structure, tackling transmission and distribution losses,addressing cultural change to counter thet and nonpayment, and introducing new legis-lation, particularly energy eiciency standards and regulation.

Poor security in energy locations is a major problem, acting as a deterrent to bothimprovements to existing inrastructure and to development o new exploration andextraction. he civilian leadership needs to pay particular attention to this and will haveto work with the countrys security apparatus to create a more comprehensive policyaddressing the underlying actors to poor security in the energy-rich areas.

Pakistan needs to make a realistic assessment o its energy mix and seek advice on howbest to develop this. Some changes will be relatively straightorwardsuch as providinga well-head price or gas, which producers would greatly welcomeothers ar morediicult, like improving security in areas like Balochistan and KPK.

As part o these moves, Pakistan needs to reconsider its use o oil and nuclear power. Itsown oil supplies are diicult to extract, and the international price o oil will onlyincrease, placing extra burden on the current account through inlated energy imports.Pakistan also aces many inancial and political obstacles to developing its nuclear powersector. Nuclear power will remain as a part o the energy mix, but it must realize that the

sector will not deliver to the degree that it envisages.

Instead, Pakistan should place greater attention on the domestic extraction o coal and,to oset the emissions aspect o this, concentrate on the growth o greener energyoptions, ranging rom hydropower to renewables.

Regionally, Pakistan must cultivate stronger energy relations with its neighbors. hereare a number o options, rom simple cross-border energy trading to wider cross-regionalgas pipelines and electricity transmission networks. In a bid to pursue regional aspira-tions, Pakistan should seek to make greater use o orums like SAARC, and in turn, try


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to elevate the issue o energy security on each groups agenda. Given Pakistans desire toashion itsel as an energy corridor and hub, improving regional coordination is key.

Internationally, Pakistan needs to oster better relations with key countries, particularlythe United States. his is going to be diicult, not least given domestic anti-Americansentiment coupled with Pakistans interests in urthering relations with Iran. Still, itshould not orget that the United States can, should it choose, give Pakistan a lot osupport both as a partner and a lobbying orce within the international community.


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Noteshe author would like to thank the ollowing individuals who provided valuable insights during the researchor this report: Saiya Atab at Strategic and Economic Policy Research, Charles Ebinger at the BrookingsInstitution, Alexander Evans at Yale University, homas Grieder at IHS Inc., and Haroon Shari at theDepartment or International Development Pakistan.

1. Circular debt reers to a structural problem in Pakistans energy market. It arises when one party, in this case,the government, withholds payments. his aects others in the supply chain, notably the power-generating

companies, with each, in turn, withholding payments. his results in operational problems or the sectorsservice providers, ensuring that power availability drops. According to the Pakistan Energy Yearbook 2010,ive o twenty-two o the countrys independent power producers ailed to produce electricity in 2009, andthe rest operated at a capacity o just 60 percent. It is likely that circular debt issues were at least partlyresponsible or this situation. See Ministry o Petroleum and Natural Resources, Hydrocarbon DevelopmentInstitute o Pakistan, Pakistan Energy Yearbook 2010(Islamabad, Apri l 2011).

2. Energy Sector ask Force (ESF), Integrated Energy Sector Recovery Report and Plan (AsianDevelopment Bank [ADB], October 2010), www.adb.org/publications/integrated-energy-sector-recovery-report-and-plan.

3. In conversations the author had with observers during the research o this report, it was suggested that themain opposition, Pakistan Muslim League-Nawaz (PML-N), would place a greater priority on addressingthe countrys energy problems than the current government. his is due to the partys probusiness ocus andmoves it has made in Punjab to alleviate power shortages.

4. Ahmad Fraz Khan, Power Shortall Increases to Over 5,000MW, Dawn, April 22, 2011.

5. Mehreen Khan, Energy Subsidies Cripple Pakistan Economy, Says Study, Financial Times Blog,July 27, 2011.

6. An article in theEconomistsuggested the amount was nearer to 3 to 4 percent. See Lights Out: PakistansEnergy Shortage,Economist, October 8, 2011.

7. Unscheduled Loadshedding Irks People in Punjab,Nation, October 2, 2011. News reports suggest thatsome parts o the country, or example, North Waziristan, suer with power outages o twenty-two hoursper day.

8. Anwar Iqbal, Pakistan Seeks Outside Help to End Energy Shortall, Dawn, April 23, 2010.

9. Javed Mirza, Energy Crisis to Weigh Heavy on Economic Growth Prospects,News, January 1, 2012.

10. Pakistan Goes All-In or Energy Security, UPI.com, December 28, 2011.

11. Ibid.

12. ADB, Integrated Energy Sector Report and Plan, 5.

13. Ibid., 2.

14. Zeeshan Javaid, Energy Crisis Aecting Social, Economic Uplit, Daily Times, September 7, 2011.

15. Ineiciency Causes Loss o One rillion Rupees, Pakistan Observer, December 6, 2011.

16. Mirza, Energy Crisis.

17. Ex-Minister to Deend RPP Contracts in SC, Dawn, October 29, 2011.

18. Nadir Hassan, Give Pakistan a Nuclear Deal, Foreign Policy, March 26, 2010

19. Ahmad Fraz Khan, Power Shortall Increases to Over 5,000MW, Dawn, April 22, 2011.

20. A number o well-argued and thought-provoking articles have ocused on Pakistans circular debt crisis,including Shahid Kardar, Circular Debt Solution, Dawn, September 14, 2011, and Salman Khalid andKamal Munir, Is the Circular Debt Real, Dawn, October 10, 2011.

21. For Appearances Sake PM Forms Committee to Deal with Power Crisis,Express Tribune, August 8, 2011.

22. It is diicult to get up-to-date igures or the extent o transmission losses. In September 2011, however, areport gave unattributed igures suggesting that our o the countrys power producers were running tenpower plants at an average eiciency o just 18 percent. Usha Ganesh, Privatization o Pakistans Power,Searchlight, September 20, 2011.

23. Wikileaks has revealed that the U.S. government conducted a three-part study o Pakistans policymakinginrastructure in mid-2008. Dawn reported the cables in ul l in July 2011, which revealed the U.S. v iew thatthe countrys power problems were the result o the haphazard mix o horizontally and vertically placedinstitutions, which comprise the energy policy making sector o Pakistan. Further to this, the cables reerredto the complex maze o GOP [government o Pakistan] policy makers who cannot co-ordinate Pakistansenergy policy due to overlapping and contradictory authorities. A lack o a distinct policy line, and conu-sion over decision making, means that basic issues like raising well-head prices (the price the producercharges or gas or petroleum) to encourage exploration and extraction are not pursued or are pursuedpainstakingly slowly.

24. Mehreen Khan, Energy Subsidies Dilemma Expose Failings o Pakistan State, Financial Times Blogs,August 5, 2011.


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PEACEWORKS 79

25. Ibid.

26. Abdul Manan, Energy Crisis: Punjab Rejects wo Weekly Holidays,Express Tribune, October 13, 2011.

27. Under the Aghaz-e-Huqooqe Balochistan package, Balochistan is to be paid PKR 120 billion in royaltiesollowing retrospective correction o past mistakes and underpayment o royalties. Prices paid toBalochistan per gas unit, currently at PKR 32.71, have also increased in recent years, but a discrepancybetween revenue and royalties to the province remain. See he Balochistan Cauldron-II by Akhtar Ali,Business Recorder, March 2, 2012.

28. One example o unsettling behavior has been Pakistans buildup o nuclear arms, apparently in response tothe development o Indias civil nuclear program, as a result o its nuclear deal with the United States.Editorial, Storing Up rouble: Pakistans Nuclear Bombs, Guardian, February 3, 2011.

29. Pakistan Working on New Petroleum Policy, Indo-Asian News Service, July 10, 2011.

30. Ahmad Ahmadani and Usman Cheema, 4PC Rise in Power aris on the Cards,Nation, October 12,2011. For isca l year 201011, the government set a target o a 15.6 percent rise in the electricity tari, butas o October, it had risen by just 4 percent.

31. ABD,Integrated Energy Sector Report and Plan, iv.

32. Zaar Bhutta, Energy Crisis: Rather than Reduce Subsidies, Government Increases Power Outages,Express Tribune,July 18, 2011. he paper reported that o the PKR 395 billion, PKR 297 billion was spenton the power sector. his included PKR 120 bil lion that the government owed the power sector. he gov-ernment also paid out PKR 82 billion to cover the costs o losses, including the nonpayment o bills, thet,and transmission losses.

33. IMF Calls Pakistans Fuel Subsidies Ineicient, Reuters,January 6, 2011.

34. Bhutta, Energy Crisis.35. Statistics rom JulyNovember 2011 show that oil imports rose 48.65 percent year-on-year, with crude oil

imports up 19 percent to $2.073 billion. his rise relected oil price increases, with Pakistans import o oilactual ly decreasing by 20 percent over the period. More broadly, petroleum products accounted or a bill o$4.225 billion over the same period, relecting a year-on-year rise o almost 70 percent. Mubarak Zeb Khan,Oil, Food Import Bil l Swells 31pc in JulyNovember, Dawn, December 21, 2011.

36. As o December 2010, Pakistan topped the global list o natural gas vehicles with 2.74 million. NGV Global,International Association or Natural Gas Vehicles, Natural Gas Vehicle Statistics: NGV Count,www.iangv.org/tools-resources/statistics.html.

37. Ashaq Bokhari, Coal Gasiication Project Delayed, Dawn, April 11, 2011.

38. Charles Ebinger reports related conversations he has had with oil exploration companies, which while unsuc-cessully looking or oil in Pakistan have repeatedly discovered reserves o gas. he government o Pakistan, inits Integrated Energy Plan 20092022, reveals the inding o what is described as a recent study, whichestimates the maximum potential at 27.5 billion barrels o oil and 145 trillion cubic eet o gas (43).

39. ADB,Integrated Energy Sector Report and Plan, 4. he ADB cites a igure o 83 percent or the 20089 iscalyear.

40. Editorial, Storing Up rouble: Pakistans Nuclear Bombs, Guardian, February 3, 2011. he paper reportedthat U.S. intelligence assessments estimated that Pakistan had one hundred weapons, more than India, andtwice as many as it had our years previously.

41. Charles K. Ebinger,Energy and Security in South Asia: Co-operation or Conlict(Washington, DC: BrookingsInstitution Press, 2011), 81.

42. Estimates provided by Pakistans Geological Survey.

43. Amin Ahmed, RS900m or har Coal Power Project, Dawn, July 22, 2011.

44. Ashaq Bokhari, World Bank and har Coal Project, Dawn, June 14, 2010.

45. hars coal has a high ash and sulphur content.

46. Zaar Bhutta, Wielding Sot Power: US Oers to Finance API Gas Pipeline,Express Tribune, December19, 2011.

47. China May Replace India in IPI Project, Press Trust o India, February 7, 2011.

48. Syed Fazl-e-Haider, Floods Play Havoc with Pakistan Power Hopes,Asia Times,August 25, 2010.49. Zaar Bhutta, Strategic Retreat: NBP, OGDC Burst the IP Gas Pipeline Bubble, Express Tribune,

December 23, 2011. In December 2011, Bhutta reported that Pakistans largest bank, the National Bank oPakistan, and its largest exploration company, the Oil and Gas Development Company Ltd (OGDCL),reused to support the governments calls or inancing. In the case o the bank, it eared orced overseasbranch closure, while the OGDCL argued that the government already owed it considerable unds.

50. Pakistan Can End Power Crisis through CASA 1000, Daily Times,August 13, 2011.

51. he issue was raised at a recent meeting o the South Asian Association or Regional Cooperation,highlighting the act that it is becoming a regional plan (rather than just India bilaterally linking up withseveral o its neighbors). Serajul Quadir, South Asian Countries to Work on Power Links, Reuters,September 15, 2011.


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52. India, Pak to Start Power, Petro rade, Times o India, January 2, 2012.

53. William MacNamara, China Proposes $15bn Indus Dam Scheme, Financial Times, June 7, 2011.

54. China Interested in Pak Hydel, Renewable Energy Projects, Daily Times, April 6, 2011.

55. Pakistans Energy Sector ops USAID Project List,Associated Press o Pakistan, August 29, 2011.

56. he United States provided Pakistan with $4.5 billion in aid in 2010, more than one-hal o which went tothe military. Karen DeYoung, US Withholding Military Aid to Pakistan, Washington Post, July 10, 2011.

57. Ibid.

58. Haris Anwar, Pakistan Seeks Local Funds or Iran Gas Deal Opposed by US, Bloomberg,August 17, 2011.

59. Anna Fiield, Gazprom in Iran Pipeline alks, Financial Times, June 11, 2009.

60. Pakistan, Russia Sign Energy MoU, Oil and Gas Journal, May 26, 2011.

61. Michael Kugelman, ilting oward ehran? Foreign Policy, September 15, 2011. Kugelman pointsout that annual grant assistance rom Saudi Arabia to Pakistan between 2004 and 2009 totaled nearly$140 million.

62. Anwar Iqbal, King Abdullah Criticised Zardari, Dawn, November 29, 2010.

63. Malik Ayub Sumbal, Pakistans Iran Overtures est Saudi Faith,Asia Times, July 26, 2011.

64. urkey to Help Pakistan

pw79 pakistans energy crisis

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